Multiplier effect

In economics, the ripple effect caused by the re-spending of income. Money spent in a local economy is re-spent by employees and suppliers, so the multiplier tries to calculate how many times this occurs.

How does this work? Imagine a tourist spends $100 on a hotel room. The hotel owner divides up that money to pay employees and suppliers (say, $60 goes to employees and another $10 to local suppliers). The employees and suppliers go out and spend money (buying groceries, for example) and of that $70, let's say $30 stays in the local economy to shopkeepers, suppliers, etc (induced effect). So the original spending might be calculated to have a multiplier effect of 2 ($100 (direct impact)+ $70 (indirect impact)+ $30 (induced effect)/$100 (direct impact) = 2); meaning that $200 was circulated through the local economy.

Urban and regional planners use the multiplier effect to calculate the net impact of a given or proposed economic activity (One reason that local governments may choose to subsidize developments such as sports stadiums or shopping destinations or arts districts is the expectation that these projects will bring in money to the local economy).

The other method of local economic development that relies on the multiplier effect is
"plugging the leaks," a strategy that encourages consumers to "buy local," thereby keeping money circulating locally. (Locally owned small businesses increase the multiplier effect, while corporate owned chains have a smaller effect as profits are exported out of a local economy to the corporate owner elsewhere).

This $500 is also equal to $100 * (1/0.2) because 0.2 is the MPS and some mathematical stuff I won't explain here. It has to do with the fact that it is the sum of the infinite series $100 * 0.8^x, where x is the set of integers from 0 to positive infinity.